Ms Dorothy Teoh, Editor in Chief The Edge
Mr Simon Soo Hu, Thompson Reuters
Mr Lee Siew Hoong, Federation of Investment Managers Malaysia
Distinguished guests,
Ladies and gentlemen
- Firstly I would like to thank The Edge and Thompson Reuters for inviting me once again to deliver this keynote address. The Edge-Lipper Awards which recognizes the “best in its class” and rewards industry excellence is an important event that the industry looks forward to enthusiastically each year. I am therefore delighted to be here to acknowledge the award winners who were the best performers amongst Malaysian unit trust managers in 2010.
- Collective investment schemes (CIS) play a pivotal role in our financial services industry as a vehicle to mobilize domestic savings into the capital market and to allow the investing public to participate in a wide range of investments that they otherwise would not have access to and to enjoy diversification with the benefit of professional investment management skills.
Industry performance over the past 10 years
- Malaysia’s Collective Investment Scheme Industry which comprises unit trusts, wholesale funds, real estate investment trusts, exchange traded funds and close ended funds grew steadily in 2010 to RM257.81 billion from RM213.39 billion in 2009. Unit trusts continued to be the largest component of the CIS industry in 2010. The industry has grown five-fold over the last decade. From a total net asset value (NAV) of RM43.3 billion at the end of 2000, the industry NAV surpassed the RM200 billion mark in the 1st Quarter of 2010 and stood at RM226.8 billion as at the end of December 2010. This is indeed a remarkable achievement.
- A decade ago, the unit trust industry comprised only 119 funds. Today, there are over 560 funds of diverse categories which allow investors exposure to different asset types, risk profiles and investment themes. Asset types today include equities, fixed income and money market instruments and fund strategies range from aggressive growth to capital protection. Funds have investment themes that focus not just on industry but also on geography and personal preferences. China focused funds and Shariah funds are examples of fund themes available today.
- Apart from the unit trust industry, there has been notable increasing interest in other forms of CIS, in particular, wholesale funds and real estate investment trusts (REITs). The number of wholesale funds that are offered to sophisticated investors has increased significantly, growing from 54 funds with an NAV of RM4.9 billion as at the end of 2008 to 107 funds with an NAV of RM18.7 billion as at the end of 2010. The aggregate net asset value of REITs grew by 71% from RM6.3 billion as at 31 December 2009 to 10.7 billion as at the end of 2010 – again a remarkable growth story.
Growth Opportunities
- Notwithstanding such robust growth over the last couple of years, there is still much room for the unit trust industry to expand. The equity penetration of unit trusts in the United Kingdom as at the end of 2009 was over 40% of its domestic market capitalization, while in Malaysia, the percentage of the total NAV of unit trust funds against Bursa Securities’ market capitalization, was only 17.8% as at the end of last year.
- Malaysia’s economic transformation also provides opportunities for the unit trust industry as the capital market is an important avenue for fund raising for projects identified pursuant to the 12 National Key Economic Areas identified under the Economic Transformation Programme (ETP), and therefore unit trusts and their investors will benefit from these investment opportunities.
8.
Under the Capital Market Masterplan, the SC executed a number of initiatives to facilitate the growth of the CIS industry, such as removing restrictions on unit trusts participating in exchange traded derivatives, allowing greater international diversification and allowing foreign majority ownership of Unit Trust Management Companies (UTMCs).
- Last year, the SC amended the Guidelines on Unit Trust Funds to facilitate multi-class structures for unit trust funds. A multi-class structure provides the flexibility for a unit trust to be offered with different features tailored to suit the preferences and needs of different investor groups. Examples of differing features include different sales charges, recurrent fees and currency denominations. While the main purpose of a multi-class structure is to allow greater flexibility in fund design to better meet investor preferences, it will also allow a fund to be offered in various currencies, other than its base currency. This facilitates the offer of a unit trust fund to foreign investors in their preferred currency.
- Opportunities for growth for the Malaysian unit trust industry are not only local, but international. The success of the industry in the domestic market along with the intellectual capital that has been built over the years provides an excellent platform for Malaysian players to launch themselves into the international arena. As part of the SC’s efforts to help our intermediaries access foreign capital and to offer their investment products and services to international markets, the SC has also entered into arrangements with our counterparts in China, Dubai and Hong Kong.
- In June 2010, Malaysia was recognized by both the China Securities Regulatory Commission (CSRC) and the China Banking Regulatory Commission (CBRC) as an approved investment destination under their Qualified Domestic Institutional Investor (QDII) regimes. This will enable Chinese nationals, through approved institutions regulated by CBRC and CSRC, to invest in Malaysian securities that have been approved by the SC, including equities, fixed income products and CIS. In addition, such Chinese institutions may also engage the services of licensed Malaysian fund managers to assist them with the QDII investment matters. Malaysia is one of only 11 jurisdictions to be recognized by the CBRC and the only emerging market recognized by both the Chinese regulators. This recognition, together with the Mutual Recognition Agreements (MRAs) with the Dubai Financial Services Authority and the Securities and Futures Commission of Hong Kong to facilitate cross-border offerings of Islamic financial products present excellent opportunities for Malaysian financial products to be offered abroad and industry players should really take advantage of this opportunity to benefit from the various avenues of access that have been opened. The SC approved a fund in November 2010 that will be distributed in Dubai and I hope more unit trust players will strive to take the opportunity to follow suit in moving into new markets.
- The SC will continue to explore avenues to open up markets to facilitate cross border expansion of the industry but it really is up to the industry to leverage on the opportunities presented and be prepared to invest both time and resources in penetrating new markets and benefit from early mover advantage.
Equally important is the need for industry players to focus on product innovation in order to compete internationally. Product innovation, whether in the form of cutting-edge investment management strategies or innovative ways of gaining exposure to diverse asset classes whilst ensuring appropriate risk management, should be a continuous effort. Unit trust management companies (UTMCs) must strive to continually develop their skill-sets and expertise. The strength of the Malaysian unit trust industry in Shariah-compliant fund management should be leveraged upon to gain a competitive advantage internationally.
Keeping true to investor expectations
- While growth and product innovation are encouraged, the industry must not forget its duty to investors. Globally, there have been concerns that competition and commercial goals have caused fund managers to shift their focus from stewardship to salesmanship. Fund managers, including UTMCs must not forget the duty they owe to investors who have entrusted their savings to such managers to be properly managed. Stewardship translates to responsible investment management and selling. UTMCs must ensure that the pressure to manufacture and market products does not compromise their obligation of stewardship. One example is in the preparation of offering documents. Offering documents are not a necessary legal evil. On the contrary, their purpose is to ensure that investors receive all the information they need to make informed investment decisions. We have often found at the SC, that in the rush to launch products, UTMCs often resort to using templates without exercising due care and diligence, and this resulted in the inclusion of information and disclosures that are sometimes inappropriate. I urge UTMCs to exercise extreme caution in providing clear and adequate information in offering documents, and ensuring that all promotional materials that are made available do not mislead and cause investors to invest in inappropriate products.
- I had shared at this event last year that the SC was exploring the implementation of a framework to reward UTMCs whose quality of applications is high and penalise those whose quality is low. As part of this effort, the SC compiled data on the quality of submissions by UTMCs for a whole year to understand trends as well as gaps in quality. Now that we have considered the results of the data compiled, the SC will be engaging UTMCs individually to discuss areas for improvement and will take the stance of immediately returning unsatisfactory submissions in the future. We believe that such an approach will help elevate the quality of submissions and the standard of the industry more effectively than a tiering system.
- Apart from the product manufacturing process which covers offering documents, product marketing which includes selling practices, is also equally important and deserves equal attention. Commission structures can contribute to overzealous selling and result in investors suffering losses. Mis-selling and poor financial advice to investors is a global concern. Recently, as most of you may have read, the Financial Services Authority (FSA) in the UK had imposed a fine on the manager of two investment funds for failing to ensure that the funds were suitable for those who had invested. The investors had invested for additional income but those involved in selling the products had not warned the investors of the risks involved. The regulator fined the fund manager close to GBP8 million and ordered compensation of GBP59 million to be paid to investors. This pecuniary action taken was the largest in the FSA’s history for a case involving retail investors. Meanwhile, across the Atlantic, a US broker paid USD119 million to settle allegations that it had misled investors about the risks of an ultra-short bond fund that was described as a cash alternative that was only slightly more risky than a money market fund.
- Therefore, funds that carry reassuring names and are sold by people who are more interested in ‘closing a sale’ rather than meeting investor needs are minefields for investors and UTMCs alike. Funds must therefore be appropriately labeled to ensure that investors have a clear idea of what they are getting into rather than be named for marketing purposes. UTMCs must also closely monitor the conduct of their sales representatives, to ensure they have sufficient knowledge of the products and to ensure that they properly inform clients of the risks involved. Unit trust consultants must always exercise due care and diligence in assessing the suitability of products in meeting a customer’s needs rather than selling unsuitable products for the sake of commissions. For the unit trust industry to succeed, investors must have confidence that the industry practices ethical standards, with investors’ interests foremost in mind. Unit trust consultants should aim for long-term beneficial relationship with investors rather than focus on short-term monetary benefit. To achieve this, UTMCs must play a stewardship role in achieving a high level of professionalism amongst their sales force rather than just focussing on meeting sales targets.
- Last year, the SC published a Consultation Paper on the Review of Sophisticated Investors and Sales Practices for unlisted capital market products. In strengthening the sales practices regime for unlisted capital market products, the SC had proposed the following measures to enhance investor protection:
Firstly, the issuance of guidance on our expectations in respect of how product distributors should perform the suitability assessment before matching a particular product with the needs of an investor;
Second, for product issuers to issue a separate disclosure document, namely a Product Highlight Sheet, when offering unlisted capital market products to investors other than to accredited investors; and
Third, the issuance of guidance that will require product issuers and product distributors to give due regard to the interests of investors in the development, marketing and sale of unlisted capital market products. The Board and Senior Management are to be accountable for setting the culture and direction of their entities, so as to align their business practices while delivering fair dealing outcomes to investors.
- We have received positive feedback from the consultation and we will be proceeding to formulate suitable and effective guidance on these matters. The Industry’s views will be sought again prior to finalizing our proposals.
FIMM is now a SRO
- The SC’s move towards a market-based approach to regulation under the Capital Market Masterplan represents a shift towards the use of competitive market disciplines and processes in pursuit of our regulatory objectives. As capital markets become increasingly complex, dynamic and rapidly changing, the role of the industry in regulation needs to be enhanced.
- The promotion of self-regulation by industry participants is thus a key element in a market-based approach to regulation. The broad objectives of self-regulation are the same as those for a regulator like the SC – namely to preserve market integrity, to ensure that no systemic risks arise, and above all, to protect investors. Effective self-regulation will complement our efforts in ensuring a more efficient and effective regulatory regime.
- In this regard, three years ago, we encouraged the industry to form their own SRO with the objective of developing and promoting the unit trust industry while setting standards for industry players. Since then, the Federation of Investment Managers Malaysia (FIMM) has worked closely with the SC and undertaken measures to equip itself to play the role of an SRO.
- I am pleased to note that the Minister of Finance approved the SC’s recommendation to recognize FIMM as an SRO under Section 323 of the Capital Markets and Services Act 2007, through a notice that was gazetted on 20 January 2011. I have full confidence that FIMM will be able to discharge its role as an SRO effectively in self-regulating its members for the benefit of the industry as well as investors.
- Through SROs, industry players can expand beyond the confines of their own interests and align their interests with that of the public. This will result in the values of ethical behavior and integrity being ingrained into corporate and market cultures. As an SRO, FIMM is expected to regulate its members, including through self enforcement, and also develop rules that are designed to set standards of behavior for its members while promoting investor protection.
- As FIMM will now play a much larger role as a public interest body, the governance structure at FIMM has been significantly enhanced with Public Interest Directors (PIDs) making up at least 45% of the Board of Directors. The SC has approved the appointment of 9 PIDs, including the Chairman who is appointed from amongst the PIDs. These directors, who are all accomplished professionals, will complement the 10 elected directors who represent the industry. The PIDs are expected to provide independent oversight over FIMM’s activities and governance and are obliged to notify the SC on any matter that adversely affects FIMM’s role in upholding public interest and investor protection.
- Amongst FIMM’s immediate tasks is to enhance professionalism of sales agents and distributors and to formulate a robust sales practices regime with adequate supervision and monitoring by FIMM. This is necessary to enhance investor confidence and protection and to ensure that investors are not misled into investing in products that are not suitable for them. FIMM will also be another avenue for investors to lodge any complaints or make enquiries on matters concerning the unit trust industry. We are confident at the SC, that FIMM will play a pivotal role in developing the Malaysian unit trust industry.
Investor Education and Human Capital Development
- While the SC will continue to review the capital market’s regulatory framework to ensure that it remains robust, we are mindful that regulatory measures must also be accompanied by effective investor education programmes. The Securities Industry Development Corporation, the training arm of the SC, and FIMM, have put in significant effort in creating public awareness and educating investors on the benefits and associated risks of investing in unit trusts.
- The growth of the CIS industry requires a parallel growth in skills and expertise. Therefore, investment in building human capital is inevitable, including enhancing skills and talent in the CIS industry. We not only need to attract bright, new talent to join our CIS industry but we also need to develop and retain the best talents that we already have. The accumulation and development of talent is critical for the success of the industry.
Conclusion
Ladies and Gentlemen,
- I hope that the recognition given to the top performers in the industry today will not only motivate industry participants towards developing professional excellence but also spur healthy competition within the industry. Competition is always welcome in our capital market as it will create a more dynamic investment environment in meeting the evolving investment needs of investors and contribute towards industry and capital market growth.
- On this note, I would like to thank you for your attention, and congratulate all the award winners this year.
Thank you.
